Margin lending profits inflated: Walker

Profits for margin lending providers are artificially high, according to an industry figure.

Mercer Fund Manager Services principal Geoff Walker says if the loss experience of players in the gearing market is substantial enough to justify the current rates, then the players should let the market know.

He says the gearing market shares similar characteristics to the home loan market, and therefore prices should reflect this. Furthermore, the market is ripe, he says, for a discount lender to force profit margins down as has happened in the home loan market.

However, Deutsche Funds Management director Sarah Brennan argues Walker is "not comparing apples with apples" by likening the two markets. She argues that lending in shares contains a greater risk.

"Share values go up and down on a daily basis, and you don't have this volatility with the housing market," she says.

"If a client doesn't meet a margin call and you have to sell the shares, there is not always a market to sell them at sufficient recovery costs," she says.

Brennan also says that the margin lending market does not have mortgage insurance like the home loan market.

ANZ Margin Lending marketing manager Sarah Frearson backs Brennan's argument. She says the two markets are distinct, with margin lenders incurring huge administrative costs in comparison to the home loan market. She also argues that, unlike most margin lenders, home lenders slug clients with establishment and ongoing fees.

However, while Walker says he applauds the gearing market for their high level of customer service, he argues the extra administration should be reducing risk.

Furthermore, he says the market is not lending against high risk shares.

"While I accept that there is the potential for volatility in a sharemarket, gearing managers lend often lend against managed funds, which generally carry less risk than direct shares," he says.